State to again charge sales tax on storage unit rentals

January 26, 2009

By Bob Mercer, American News Correspondent Difficult financial times led to an unusual turn of events Monday at the state Capitol. The state Senate voted 18-17 to impose sales tax on storage unit rentals in South Dakota, in the process setting aside a decision made last month by the state Supreme Court that storage rentals weren't subject to state sales and use tax. The state Department of Revenue and Regulation had been collecting the tax since 1995 prior to the state high court's ruling. The Legislature rarely goes so far as to abrogate a Supreme Court decision. At stake is $1 million annually, which Senate Republican leader Dave Knudson of Sioux Falls said is a significant amount when state government's budget deficit for 2010 stands at $80 million. He said the deficit could be $95 million if the Legislature doesn't take some of the other steps recommended by Republican Gov. Mike Rounds. “It would be foolish of us indeed to not reinstate this tax,” Knudson said. “The court said no, but it is still within our legislative prerogative if we want to tax this service.” Countered Sen. Gordon Howie, R-Rapid City: “No matter what you call it, it is a tax increaseÉ Just because we have a budget deficit, the order of first resort should not be a tax increase.” The measure, SB 42, now heads to the House of Representative for consideration. The legislation originally contained an emergency clause, meaning it would take effect immediately upon the governor's signature rather than the standard July 1 starting date for new laws. The emergency clause meant the bill originally needed a two-thirds majority vote of 24 senators for passage. The bill fell short 20-15. Knudson then called for removing the emergency clause, followed by Lt. Gov. Dennis Daugaard ruling that only a simple majority of 18 members would be needed. South Dakota voters in 1996 amended the state constitution regarding taxes. The constitution says: “The rate of taxation imposed by the State of South Dakota in regard to any tax may not be increased, and no new tax may be imposed by the State of South Dakota unless by consent of the people by exercise of their right of initiative or by two-thirds vote of all the members elect of each branch of the Legislature.” Senate Democratic leader Scott Heidepriem of Sioux Falls told Daugaard that the legislation's title began with the phrase: “An Act to impose the sales tax on gross receiptsÉ” But Daugaard said the legislation didn't increase the rate and didn't impose a new sales tax. He said a similar conclusion was reached at the Legislative Research Council, the nonpartisan professional staff that serves the Legislature. The legislation was introduced by the Revenue Department with Gov. Rounds' consent. Rounds is supporting Daugaard's planned candidacy to seek the Republican nomination for governor in 2010. Daugaard's simple-majority ruling led Sen. Ben Nesselhuf, D-Vermillion, to announce he was switching his position and would vote against the bill. Also changing to “no” was Sen. Gary Hanson, D-Sisseton. The issue was taken to the Supreme Court by James Pirmantgen and Patricia Carlson, who own a self-storage facility in Sisseton. Circuit Judge Jon Flemmer ruled they didn't provide a service, and the Revenue Department didn't challenge that finding. Instead Revenue's lawyers argued to the Supreme Court that storage should fall under the definition of warehousing. The Supreme Court disagreed, voting 3-2 in favor for Pirmantgen and Carlson. The legislation passed by the Senate on Monday specifically says the Legislature's original intent was to tax storage services and the Supreme Court decision of Dec. 23 “is abrogated.” The legislation further specifically states the sales and use tax applies to the business of renting min-storage units, self-storage units or storage space, as well as the privilege of using them. The Senate Taxation Committee had endorsed the bill 7-2 last week. Sen. Tom Hansen, R-Huron, said Monday the situation needs to be addressed as “quickly as possible.” But Sen. Gene Abdallah, R-Sioux Falls, argued that the legislation is double taxation. Abdallah said storage businesses already pay real-estate taxes on their buildings and land, similar to taxation of a rental house or commercial rental space is handled. He said sales tax isn't charged on rentals of houses and commercial buildings, and therefore shouldn't be charged for renting storage space. “I think the Supreme Court is right and we overstepped our bounds way back,” Sen. Jim Hundstad, D-Bath, said. He argued that the renters are indirectly paying the property tax through their rent. But Knudson called Abdallah's argument “100 percent fallacious” and pointed out that sales taxes are charged on rentals of motel and hotel rooms if the stay is shorter than four weeks.